Last monsoon, International Coal Ventures (ICVL), which is backed by five major public sector units (PSUs), put in a bid for an Australian mine. With approximately 200 million tonne in reserves and owned by Stanwell Coal Corporation, it could have been ICVL’s first acquisition. But ICVL was outbid by another Australian player by more than 85 per cent. The Indian company decided to bow out of the race.
No one wants to comment on whether it was a good decision or a bad one, but as state-owned Coal India (CIL) Chairman & Managing Director Partha Bhattacharya puts it: “In our business development planning, it is more important to not take a wrong decision than take a right decision.”
In contrast, private companies have of late been on an acquisition spree overseas. In 2010 alone, JSW Energy has bought coal mines in South Africa and Botswana, Essar Steel purchased Trinity Coal of the US and also took management control of Zimbabwean iron-ore company Zisco, Adani Enterprises picked up Linc Energy of Australia and Lanco Infratech acquired Griffin Coal of Australia.
These private companies are much smaller than their PSU peers like NTPC, CIL and National Minerals Development Corporation, who are market leaders in their businesses, but have not met with much success in overseas acquisitions. The three, along with Steel Authority of India and Rashtriya Ispat Nigam, are shareholders of ICVL.(Click for graph)
Though a senior executive with a state-owned company says some of these private sector acquisitions are “merely big announcements intended to make headlines” and are not big in terms of actual production, he admits that the PSU structure leaves much to be desired. It is no surprise, therefore, that only CIL has managed to pick up a coal mine in Mozambique, which it is yet to develop.
The remaining four PSUs, who are dependent on coal and iron ore for their production, are still waiting to make a debut. “Unlike a private sector manager, one person cannot decide to bid for an asset in the public sector. It also not fair to do so, since it is the government’s — or, public — money,” says Rana Som, chairman & managing director, NMDC.
Despite ICVL’s structure, decision-making can still be a tedious exercise. “Though ICVL is a private company, it draws money from PSUs that are owned by the government and, therefore, we need to be cautious,” says another senior executive. In a government company, systems and procedures do not allow decisions to be taken across the table, while a private sector company can take a decision even on the telephone, he points out.
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There are, in fact, varying views on how far ICVL is empowered. An executive involved with overseas acquisitions in one of ICVL’s promoter companies says that a joint venture structure could see the five PSUs pulling the organisation in different directions.
SAIL Chairman C S Verma, who also heads ICVL, however, insists that ICVL has “adequate resources and experienced people working for it and is in constant touch with leading investment bankers to assist it in making acquisitions.” Bhattacharya too does not see the ICVL structure as a constraining factor and adds that with five senior people on its board, a decision can be taken easily.
One of the first decisions during an acquisition process is to appoint an agency for due diligence. In a government set-up, where the lowest bidder is selected, this selection can take up to three months. “To get over this process, we now maintain a panel of consultants from which we choose the agency. This process takes 15-20 days. This will give dividends in future,” adds Som.
NMDC will also be tying up with private companies to exploit iron ore and other minerals like coal, manganese, diamonds and gold either in the form of leases, purchase of properties from foreign countries directly or through special purpose vehicles.
For NMDC, the priorities are clear. It has joined ICVL only to look for opportunities in coking coal, not thermal coal. “Our country’s production of coking coal is stagnating and in few years we will be importing 80 per cent of our requirement. We need to aggressively acquire coking coal assets. For thermal coal, Coal India is on the job. As regards iron ore, with 200 billion tonne reserves of high-quality ore, I do not need to look for assets overseas, but for future raw material security we are working on certain iron-ore properties,” says Som.
Similarly for SAIL, which imported a substantial quantity of its 13-6 million tonne coking coal requirements last year, securing raw material for future expansion is important. The company is largely focusing on developing its domestic captive mines — whether coal or iron ore — and has left its overseas ambitions for ICVL to pursue.
“Aggression depends on the level of desperation. Countries like Japan and Korea do not have any coal of their own and so they do not have any option. We have shortages in our country, but we always have a fall-back option of exploiting our resources,” says a senior executive.
India, as opposed to China, has been less aggressive. As one senior executive points out: “In China, the state shows the way forward and corporates follow. In India, companies show the way and the state restricts.” Bhattacharya, however, sees nothing wrong in being cautious. “The Indian government sector has been cautious and there is no harm in that. China does not consider viability as the supreme factor, but we think of returns and financial gains,” he adds.
Until as late as 2007, no government company even looked for mineral assets overseas. In fact, having a captive mine was not considered to be an advantage until even five years ago, since coal and iron ore were available on the market at only a slightly higher cost than from captive sources. Things changed with the commodity boom. Coal Videsh started as a supplementary activity of CIL three years ago; ICVL was set up two years ago.
Did these companies miss the bus when commodity prices were low? “We do not believe so. During the slowdown, the availability of assets was practically nil. No owner of an asset would sell when prices are at their lowest,” argues Verma.
The government is working on a policy to promote overseas acquisitions through a special cell within the Prime Minister’s Office. However, with the commodity cycle on an upswing, it is difficult to get assets cheaply. Besides, following such a route could add another layer to government decision making. Nevertheless, Verma adds optimistically, “Wait for a while. You will witness the results yourselves.”
| C S Verma Chairman, Coal India ‘In our business development planning, it is more important to not take a wrong decision than take a right decision’ Rana Som Chairman, NMDC ‘Unlike a private sector manager, one person cannot decide to bid for an asset in the public sector. It is the government’s money’ |